Microsoft Still Hurting After Windows RT Mess

by Brad Moon | August 16, 2013 9:21 am

Counting the ways Windows RT is in trouble could keep you busy for hours — assuming you had the patience.

Microsoft’s (MSFT[1]) foray into the world of consumer tablets and tablet operating systems started off splashy and full of hype[2], but soon suffered from the polar opposite of the iPad effect. While companies were piling on the Apple (AAPL[3]) bandwagon, sending iPad sales through the roof and kicking off the tablet revolution, they can’t seem to distance themselves fast enough from the steaming mess of Windows RT.

Instead of serving as Microsoft’s launchpad to reclaiming past PC glory in the mobile computing paradigm, Windows RT has hurt the company. But just how bad is it?

Before I start getting accused of bashing Microsoft and favoring Apple, let me state up front that Microsoft has had encouraging success with its Windows 8 Pro tablet efforts. According to IDC, in Q2 2013, Windows 8 tablets captured a 4% marketshare worldwide, moving 1.8 million units[4].

Microsoft’s own Surface Pro hasn’t fared as well as the company hoped — one of the reasons the company has slashed prices by $100 in time for back-to-school buying season. That being said, as a platform, going from zero to 4% of world tablet sales in less than a year is a decent accomplishment. I’ve reviewed a number of Windows 8 tablets and the experience with some of them was quite good.

I still think Windows 8 tablets have a future in the enterprise market (less so in the consumer world), but Microsoft’s own Surface Pro tablet is (or was) too expensive and a tad bulky.

Now back to Windows RT and Microsoft’s Windows RT tablet. I’m not going to make you read through all the gory details. If you’ve been following the technology industry at all, you can probably cite half of them by heart, but here are a few key bullet points:

Nvidia (NVDA[10]) — the company that makes the Tegra processors that power RT tablets — is blaming a $300 million hit to its bottom line on Windows RT’s poor performance[11].

So just how badly has Windows RT hurt Microsoft?

There was the $900 million inventory write-down, the $1 billion the company spent marketing Windows 8 and the Surface tablets, the product development costs for both the operating system and its own Surface RT tablet and the cash bonuses Microsoft was offering developers to create apps.

The total dollar amount will likely be never known, but it seems safe to say it’s a few billion. Even a company as big as Microsoft would rather not be throwing that kind of cash away.

Looking at earnings in its Q4 of last year[12], the Windows division made $2.4 billion on $4.1 billion in revenue. (And that’s including a $540 million hit for a Windows upgrade promotion). Those numbers were supposed to improve significantly this year with the introduction of Windows 8 and Microsoft’s new tablets. Instead, in its fiscal Q4 2013 released in July, Microsoft reported Windows division revenue was up slightly to $4.4 billion, but earned only $1.1 billion — a 54% decrease from last year.

Not all the damage can be blamed on Windows RT — Windows 8 didn’t exactly set the world on fire either[13] — but Microsoft investors are unlikely to sit still if the division continues to underperform and the company continues fiddling with Windows RT. There have been more than a few calls already for CEO Steve Ballmer’s head[14] over the whole tablet thing.

A bigger issue may be the public relations mess Surface RT has created. Consumers were confused from day one about the difference between Windows 8 Pro and Windows RT. That confusion likely had an impact on the Surface Pro tablet and Windows 8 sales. OEM partners were less than impressed that Microsoft was selling its own tablet and thus competing against them.

The constant dissing of the platform by Microsoft hardware partners followed by fire sale pricing of Surface RT tablets has hurt Microsoft’s public image as well, making the company look bumbling compared to “cooler” technology competitors like Google and Apple. When consumers are looking to buy, make no mistake, that “cool” factor comes into play and the negative vibe from Windows RT could rub off on other Microsoft products.

In other words, now might be a good time to cut the losses, admit Windows RT was a failure and focus on improving and promoting Windows 8 Pro tablets instead — the ones that are actually charting.

However, despite the fiasco Windows RT has been thus far, Microsoft isn’t abandoning its consumer tablet plans just yet. It looks as though the company will soldier on in hopes the tablet and its mobile OS eventually succeed — a move likely to extend the Windows RT bleeding.

Reports suggest that the company has begun testing on a second-generation Surface RT. If so, Microsoft is going to be desperate to have it in on store shelves by Christmas[15] to fend off Google’s (GOOG[16]) new Nexus 7, expected new Kindle Fire HDs from Amazon (AMZN[17]) and the next version of Apple’s iPad Mini.

Ballmer and company need to move 6 million or so unsold Surface tablets first[18], though, and they might have to take an even bigger loss to do it.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.